NBFCs to use RBI's liquidity boost to focus on refinancing debt obligations

India’s cash-starved shadow banking sector will get a breather out of the liquidity boost the Reserve Bank of India (RBI) has given.
 

Part of it will be used by the shadow lenders to refinance their debt obligations at a time when their cash flows could be affected with a moratorium on term loans.
 

On Friday, the Reserve Bank of India (RBI) came up with policy measures to ensure there is enough liquidity in the system.
 

The central bank said it would conduct auctions of targeted term repos of Rs 1 trillion of a three-year tenor at a floating rate linked to the repo. Moreover, measures like relaxation in the cash reserve ratio (CRR) and increase in accommodation under the marginal standing facility (MSF) will also release Rs 1.37 trillion each into the system.
 

All three measures will inject liquidity of Rs 3.74 trillion to the system.
 

The RBI has said the liquidity banks avail of under the long-term repo scheme has to be deployed in investment-grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 25, 2020.

“A number of NBFCs will have cash-flow issues in the near term as their normal collections will be impacted. As long as the lockdown is in place, disbursements by NBFCs will remain significantly affected and at the same time collection will also be low. But there could be fixed expenses like rent, salaries, and debt market repayments, which they will have to manage,” said Krishnan Sitharaman, senior director, CRISIL Ratings.

A large part of the corporate bond issues, almost 60 per cent, is from NBFCs.
 

“The bond market is a large source of funds for non-banking financial companies (NBFCs), including housing finance companies, and as of now there is no moratorium given by the bond market for repayment. We believe that additional bank borrowing by NBFCs would largely refinance their bond market borrowing,” says Prakash Agarwal, head, financial sector ratings, India Ratings.
 

With NBFCs (and all lenders) expected to put a moratorium on term loans, shadow banks might face a squeeze in liquidity because they would need to service their capital or bond market obligations.
 

Bond market debt obligations would cover a rollover of commercial paper and a periodic repayment of long-term debt.

Apart from bank borrowing, long-term repo operations (LTROs) are likely to be good option. Anil Gupta, head, financial sector ratings, ICRA, said: “The money through LTROs will not affect the liquidity of banks because it is coming through RBI funding and the cost is low.”
 

There was a sharp increase in bond yields due to liquidity tightening and risk aversion. So, the money that will flow to NBFCs will help to bring the yields back to a normal level, Gupta added.
 

Thus, responses to this LTRO would be crucial. Some industry experts say NBFCs’ moratorium for their customers would depend upon the moratorium of banks for NBFCs. The jury is out on this.
 

HFCs are unlikely to see growth in disbursements, given the current conditions. However, the overall demand is expected to pick up once the lockdown period is over.
 

“With muted credit demand, and given the prevailing situation, many NBFCs are likely to be very cautious to lend. In the case of some segments such as housing and automobile, among others, recovery in the credit demand could take longer time,” Aggarwal added.
 

“Demand for home loans from the informal sector and unorganised sector is expected to be highly depressed and will take five-six months to revive after the lifting of the lockdown while demand from organised sector employees may resume as usual,”
said Deo Shankar Tripathi, managing director and chief executive officer, Aadhar Housing Finance.